Kuwait

Lower interest rates, non-oil economy will support growth in 2025

Economic growth is expected to resume in 2025, mainly on the back of a resilient non-oil sector driven by real estate, manufacturing (including refining following increased activity at the Al-Zour refinery) and transport. Lower inflationary pressures, coupled with central bank rate cuts in line with the US Fed's monetary easing, will also support growth. Due to the OPEC+ decision in December 2024 to extend production cuts until the end of 2025, Kuwait's oil production is expected to increase very modestly by 3% y-o-y to 2.9 million barrels per day (bpd) in 2025. However, the country's refined output will increase with the Al-Zour refinery operating at full capacity. Lower inflation and decline in interest rates will boost private consumption (45% of GDP) and investment (around 15% of GDP).

The suspension of Parliament would accelerate fiscal reforms, which in turn are expected to support private investment in the medium term. The authorities will primarily focus on the expansion of the oil and transportation sectors within the country's National Vision 2035 plan (construction of a new airport terminal, development and expansion of several maritime ports, creation of the Kuwait National Railroad and the Kuwait Metropolitan Rapid Transit System, etc.). Kuwait has announced its intention to increase its oil production capacity from the current 2.9 million bpd to 4 million bpd by 2035. The country also aims to increase its daily gas production capacity from the current 17 mcm to 56.6 mcm, requiring a total investment of USD 410 million into new and existing fields, and into new processing facilities. These targets will ensure that government spending, primarily capital spending, continues to contribute significantly to growth, the former accounting for 15% of GDP. However, the country's limited economic diversification (with oil representing nearly 90% of total exports and 50% of GDP) will sustain imports of goods and services. Given the expectation of sustained low global energy prices in 2025, this will contribute to a reduction in the country's external surplus.

Rebuilding fiscal and external surpluses

In 2025, Kuwait's merchandise trade surplus is expected to narrow as cuts to oil production agreed by OPEC+ are to remain in place until April 2025 and a downward trend in global energy prices is expected. In addition, import demand is likely to increase as domestic economic activity picks up and low interest rates support demand., the primary income surplus is expected to rise to 21.5% of GDP in 2025 from around 20% in 2023, driven by the positive trend in global equity and bond markets, which will positively impact the revenues of the Kuwait Investment Authority (KIA). Lower interest rates and the robust growth of the US are also expected to support Kuwait’s primary income although there are some risks related to geopolitical and global trade dynamics. Despite a decline in the external surplus, Kuwait's external buffers are projected to remain robust, with a total international reserve of around USD 45.5 billion as of November 2024 (covering 8.5 months of imports) and total assets of the KIA estimated at USD 970 billion (six times Kuwait's GDP).

Excluding the transferred KIA's revenues, Kuwait's budget deficit is projected to rise from 5.5% of GDP in 2024 to 6.5% in 2025. This is primarily due to two key factors: lower oil prices (which account for 70% of total fiscal revenues) and significant infrastructure investments aimed at diversifying the economy. Consequently, capital expenditures (approximately 4% of GDP) are projected to increase by nearly 6% y-o-y in 2025, while current expenditures (around 45% of GDP, of which public wages account for 40%) are expected to rise by around 1%. The dissolution of Parliament in May 2024 is expected to facilitate the implementation of fiscal reforms, including the introduction of a 15% tax on corporate profits, the reduction of public sector wage premiums, and the gradual reduction of hydrocarbon consumption in favor of renewables, though these are expected to be implemented at a gradual pace.

Low political risk, fiscal reforms on the horizon

Kuwait is a constitutional monarchy. The National Assembly, comprising 50 directly elected members, holds legislative power. Laws enter into force after being approved by the Emir. In May 2024, the Emir of Kuwait, Mishal Al-Ahmad Al-Jaber Al-Sabah, who was the world's oldest crown prince before becoming Emir at the age of 83 in 2023, announced the dissolution of Parliament and the suspension of certain articles of the Constitution for a maximum of four years, with the powers of the National Assembly to be assumed by the Emir and the country's cabinet. The move made it the fourth time that Parliament has been dissolved in Kuwait's recent history. The recurring challenges in Kuwait are primarily attributed to the distribution of powers between the cabinet and Parliament, leading to prolonged periods of political deadlock. This recent decision is expected to facilitate policymaking for the government and address the ongoing issues, particularly regarding the fiscal reforms (i.e. increasing non-oil fiscal revenues, restriction of fiscal spending, etc.) and “Kuwaitization” of the workforce. With a population of around 5 million, of which only 1.5 million are nationals, and consequent high dependence on foreign labour, it will be challenging to achieve this goal. The reaction of neighboring countries and the US, which use local air bases, to the suspension of the Parliament was limited.

Kuwait's improved relations with both Iran and Saudi Arabia are expected to keep local geopolitical risks balanced. In September 2024, Kuwait and Iraq expressed the mutual resolve to improve their relations. Such a development should help promote regional stability despite their unresolved territorial disputes (e.g. the Khor Abdullah waterway and the Durra gas field). However, should conflicts in the Middle East worsen, Kuwait would likely to be negatively affected.

Last updated:December 2024